Keeping Score
Money can function as a score for achievement and self-worth. The emotional cost of admitting failure or accepting responsibility can then distort decisions about losses, regret, and risk.
THE IDEA
SPEAKING OF RISK POLICIES
“Tell her to think like a trader! You win a few, you lose a few.”
“I decided to evaluate my portfolio only once a quarter. I am too loss averse to make sensible decisions in the face of daily price fluctuations.”
“They never buy extended warranties. That’s their risk policy.”
“Each of our executives is loss averse in his or her domain. That’s perfectly natural, but the result is that the organization is not taking enough risk.”
32
KEEPING SCORE
Except for the very poor, for whom income coincides with survival, the main motivators of money-seeking are not necessarily economic. For the billionaire looking for the extra billion, and indeed for the participant in an experimental economics project looking for the extra dollar, money is a proxy for points on a scale of self-regard and achievement. These rewards and punishments, promises and threats, are all in our heads. We carefully keep score of them. They shape our preferences and motivate our actions, like the incentives provided in the social environment. As a result, we refuse to cut losses when doing so would admit failure, we are biased against actions that could lead to regret, and we draw an illusory but sharp distinction between omission and commission, not doing and doing, because the sense of responsibility is greater for one than for the other. The ultimate currency that rewards or punishes is often emotional, a form of mental self-dealing that inevitably creates conflicts of interest when the individual acts as an agent on behalf of an organization.
When to use it
Investing: Evaluating portfolio performance infrequently to avoid emotional reactions to short-term fluctuations.
Business strategy: Setting explicit risk policies for the organization to counteract individual loss aversion.
Personal goal setting: Reframing failures as learning experiences to overcome the reluctance to cut losses.
Hiring and delegation: Recognizing how scorekeeping can create conflicts of interest when acting as an agent for others.
FROM THEORY TO EVERYDAY LIFE
In practice
Thinking like a trader
Advising someone to adopt a trader's mindset: accept small wins and losses rather than being emotionally affected by each outcome.
Quarterly portfolio evaluation
An investor decides to review their portfolio only once a quarter because daily price fluctuations trigger loss aversion and poor decisions.
Extended warranty policy
A person or organization establishes a policy of never buying extended warranties, treating it as a risk rule to avoid emotional decision-making.
Organizational risk aversion
Executives are individually loss averse in their domains, leading the organization as a whole to take insufficient risks even when each executive sees caution as protecting their own area.
A MOMENT TO REFLECT
Put it to work.
How does keeping score in your financial or career decisions affect your willingness to take risks?
Can you recall a situation where you refused to cut losses because it would admit failure? What was the outcome?
In what ways do you draw a distinction between omission and commission in your own decision-making, and how might that bias your choices?
CONTINUE THE CONVERSATION
Source texts
- Thinking, Fast and Slow (Daniel Kahneman)